I have always been believer of the fact that timing the market is impossible; particularly because the numbers of variable factors are beyond oneâ€™s imagination and as we move forward the variables will increase. However what I certainly believe is that one can price the market just like one determines the valuations of the stocks before investing.
Even while pricing we wonâ€™t consider complex valuation methods because at times a simpler approach can be more effective than the most complex analysis.
Our market’s are attractively valued based on long term averages
It’s always better to take some cues from the past and when it comes to stock markets there’s no better guide than your past experiences.
We believe tracking historical valuations and correlating them with the present can unfold a picture worth a 1000 words and some of the below pictures are doing just that.
As can be observed from the above pictures, it’s after many years (2008 was an exception which occurs only once or twice in a century) we are approaching the lower range of 3 for Price to book value of SENSEX and higher yields of 1.5%.
Based on our calculations, the average Price to Book value for SENSEX for the period ranging from 2001 till present is 3.62 while at present we are trading almost 10% below the long term averages. Similarly the yields are in excess of 1.5% and very close to historical yields of 1.58%.
When it comes to investments, those made at low valuations reap the maximum gains and valuations are likely to be low during times of pessimism and negative news flow. We are in the midst of all that and that’s why we are witnessing cheaper valuations.
Now look at this below figure, picked up from a report of a leading Mutual Fund which very rightly explains that why equity investors are in for some very exciting times provided their time horizon is 2 years or more.
We believe it’s an opportune time to start making staggered purchases in the stocks of good companies. On reading this the bear camp may get annoyed and can come up with a counter argument that Price to Book value of SENSEX can drop further to 3 or the US is in crisis, Eurozone is in dire straits, slowdown in India, high inflation, etc.
Well frankly speaking the arguments against investing can be many and I myself can enlist them while I just have two arguments in favor of making stock investments and those are:
- Cheaper valuations and
- The very bright growth prospects of the Indian economy.
And finally for those who believe they will buy only at the bottom, here are a few thoughts you must ponder over.
- What if the market does not correct by another 10-15%?
- What if the stocks that you like, don’t come down during market corrections?
- What if the market remains range bound at current levels for some time and then move up?
Well I am ready to bear a notional loss of 10-15% than lose out on an opportunity of substantial gains as can be observed from the third picture.
Ekansh Mittal [[email protected]]